With labor costs rising, Taiwanese businesses consider leaving mainland

By Li Xuanmin Source:Global Times Published: 2016/8/23 20:13:39

Should I stay or should I go? That's the question now facing many Taiwanese business owners operating on the Chinese mainland. A growing number are opting for the former, especially those in areas where Taiwanese companies have concentrated their investments, such as Dongguan in South China's Guangdong Province, according to media reports and industry players. Taiwanese companies operating on the mainland currently face two major problems: growing competition from mainland peers and rising labor costs. Experts suggest that Taiwanese companies should strive to upgrade and innovate to become more competitive.


A pedestrian walks past a Foxconn factory in Shenzhen, South China's Guangdong Province, in April 2015. There have been frequent media reports this year that the Taiwanese company, the biggest contract manufacturer for Apple Inc's iPhones, plans to move its Chinese production lines to India to reduce costs. Photo: IC

A Taiwan businessman lamented on Sunday that there will soon come a time when he won't have anyone to play Taiwanese mahjong with in Dongguan, South China's Guangdong Province.

"Several of the businessmen from Taiwan who started businesses on the Chinese mainland at the same time as me are leaving," the 53-year-old businessman surnamed Xue told the Global Times.

Xue, who has been doing business in Dongguan for 16 years, said he is thinking about selling his factories on the mainland and moving elsewhere.

At present, Xue's family-owned company employs about 300 workers to manufacture clothing and bags for sale on the mainland and Southeast Asia markets.

"We used to receive bulk orders worth 100 million yuan ($15 million) a year," Xue said. "But my company's revenues have fallen sharply in recent years, probably because of the boom in the mainland's e-commerce sector."

When Xue opened his first factory on the mainland in 2000, he didn't think he would lose money.

In the early 2000s, investment from Taiwan flooded into the mainland, driven by government inventive policies and low labor costs. This was especially true in populous regions near the Southeast coast, such as the Pearl River Delta in Guangdong and Yangtze River Delta in Eastern China.

By December 2015, Taiwanese businesses had invested $62.69 billion in the mainland, according to a statement on the Ministry of Commerce's website.

However, by then the tide had already begun to turn in cities like Dongguan and Kunshan, East China's Jiangsu Province, according to businessmen in those cities.

"Last year, the number of Taiwanese enterprises in Dongguan tumbled by 25 percent to 30 percent from the year before," said Zhai Suoling, the president of the Taiwan Businessmen Association in Dongguan.

Moreover, the number of Taiwanese manufactures in Dongguan shrank from 6,000 in 2014 to 4,000 in 2015, Zhai told the Global Times on Monday.

Growing competition

One of the major problems facing Taiwanese entrepreneurs is the intense competition from mainland manufactures, said Dai Shugeng, an professor of international finance at Xiamen University.

For example, Taiwanese companies had until recently held a huge advantage in the mainland's semiconductor industry, which provides a vital component for computer chips and other electronics, Dai said.

The Chinese mainland became the world's largest semiconductor market in 2014, accounting for approximately 60 percent of the global demand, according to a report by research institute eeworld.com.

Before 2014, mainland companies manufactured about 8 percent to 10 percent of the semiconductor products in the market. In June of that year, however, the State Council, China's cabinet, published guidelines to strengthen government support for mainland semiconductor manufacturers to help them gain market share.

It also set up an industry fund with 120 billion yuan to make investments focusing on the construction of advanced process capacity, semiconductor film reorganizations, and mergers.

The mainland's semiconductor industry subsequently took off, with the self-sufficiency rate jumping to 27 percent in 2015, according to a report on eeworld.com. At that growth rate, the figure would increase to 70 percent by 2025, according to a recent government report.

Meanwhile, the equipment of state-of-the-art chipmaking plants gave birth to a number of world-class high-tech companies on the mainland, such as Huawei, Oppo and ZTE, whose products are impressive both in terms of price and quality, experts noted.

"Taiwanese enterprises are embarrassed," Dai said. "They have lost their price advantage against their mainland peers, and they don't have the technological know-how of their European and American competitors."

Rising costs

Along with intensifying competition, the Taiwan owners of labor-intensive factories are also dealing with rising costs, specifically worker wages.

"I visited the Chinese mainland in 1995 at a time when Taiwan was getting stricter about tax policy and labor costs were surging," Zhai said.

After seeing what the mainland had to offer, he decided to open a toy factory in Dongguan.

The city's official rolled out the red carpet for him, he said. The approval process to open a factory was so simple that it only took about a month and a half to complete.

At the time, Taiwanese investors were entitled to a two-year exemption to China's corporate income tax followed by three years of only paying the tax at half the normal rate.

"But those incentives are no longer available now, and we are facing soaring labor costs and land price," Zhai complained. "Companies operating on the mainland are also required to pay into the basic social security scheme for every employee, which increases our expenses by 30 percent to 40 percent."

To cut costs, Zhai and other Taiwanese businessmen have moved some of their factories to western China. Others relocated entirely to Vietnam, Thailand or other countries in Southeast Asia.

The uninterested youth

Xue's son, who pursued postgraduate study in the US, showed little interest in taking over the family business, Xue said. His son thinks manufacturing dull and would rather open a coffee shop or a bed-and-breakfast.

The children of many Taiwan businessmen are considered xiao quexing, or those of "little but true happiness," Caixin Weekly reported.

The term refers to young people who lack their parents' ambition and instead prefer to do things they enjoy, even if those things don't make them rich.

Young Taiwanese are well-educated and have an international outlook, but they don't have their parents' enterprising spirit, experts said. They are happier doing things they think are creative or interesting.

But this also opens the door for the transformation of the mainland business model, and young people from Taiwan may excel in industries related to creativity and services, according to the Caixin report, which cited Deng Xiwei, representative of the Taiwan Trade Center in Shanghai.

"The younger generation has played a role in the closings of mainland businesses, but a more pressing issue for these Taiwanese companies is how to spur technological innovations and upgrade their businesses. This in turn will elevate their core competitiveness," Dai said.

"Otherwise, leaving the mainland is just a temporary solution," he said.
Newspaper headline: Moving on


Posted in: Insight

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